RBI releases draft rules for Fintech Self Regulatory Organisations

The Reserve Bank of India on Monday released a draft framework for recognising self-regulatory organisations for the fintech industry and has sought comments from the public and stakeholders by the end of February before it frames the final rules.

“FinTechs are significantly reshaping the landscape of financial services by streamlining processes, improving accessibility, and reducing costs. Achieving a healthy balance between facilitating innovation by the industry on the one hand, and meeting regulatory priorities in a manner that protects consumers and contains risk, on the other, is crucial to optimising the contribution of the FinTech sector. Self-regulation within the FinTech sector is a preferred approach for achieving the desired balance. Accordingly, the Reserve Bank has today placed on its website, a 'Draft framework for recognising Self-Regulatory Organisations (SRO) for FinTech Sector'. The draft framework lays down the characteristics of a FinTech SRO, and includes, inter-alia, functions, governance standards, etc.,” RBI said.

First, RBI said, that SRO-FT would derive its strength from its membership, ensuring that it is truly representative of the FinTech sector, and must be looked up to and accepted by the industry as the key body for setting market standards, defining rules of conduct and ensuring voluntary adoption of the common framework by its members.

Secondly, the SRO-FT should be development-oriented, actively contributing to the growth and evolution of the industry. This involves providing specialised knowledge and expertise, offering guidance, contributing to capacity building through training programs, and prescribing minimum eligibility criteria for its members, RBI said.

Third, to maintain credibility, the SRO-FT should operate independently, free from the influence of any single member or group of members. This would ensure unbiased decision-making and prevent the organisation from being swayed by the interests of a dominant few. The SRO-FT should maintain impartiality, avoid conflicts of interest, and ensure unbiased oversight over its members.

Fourth, members should perceive the SRO-FT as a legitimate arbiter of disputes. This would require a transparent and fair resolution mechanism for disputes arising among members that instil confidence in the FinTech industry.

Fifth, a proactive SRO-FT should be capable of motivating its members to align with regulatory priorities. This would involve facilitating communication between industry players and regulatory bodies, advocating for necessary changes, and promoting a culture of compliance.

And lastly, as a repository of information, the SRO-FT should collect, analyse, and disseminate relevant data about its members' activities.

RBI has proposed that the SRO-FT applicant should be set up as a not-for-profit company registered under Section 8 of the Companies Act, 2013. The applicant should have sufficient net worth and demonstrate the capability of establishing the necessary infrastructure to fulfil the responsibilities of SRO-FT effectively, and consistently. In this respect, the SRO-FT should have a robust IT infrastructure and the ability to deploy technological solutions within a reasonable timeframe, RBI added. The SRO-FT should also only set up entities/offices overseas with the prior approval of the Reserve Bank of India.

The applicant SRO-FT should represent the FinTech sector with membership across entities of all sizes, stages and activities. If representation is inadequate at the time of application, the application should include a roadmap for achieving this within a reasonable timeline. Failure to demonstrate or attain comprehensive membership could result in denial or revocation of recognition, the draft rules proposed.

Membership of the SRO-FT should comprise members who are FinTechs, and membership should be voluntary. FinTechs would be encouraged by the Reserve Bank to become members of a recognised SRO-FT.

The SRO-FT should guide the conduct of its members, ensure that they adhere to industry standards, comply with relevant laws and regulations, and maintain high ethical standards, as well as be responsible for addressing any grievance, conflict of interest, or dispute, RBI proposed.

The SRO-FT should frame a code of conduct for its members, customised to the nature of various sets of activities undertaken by them. It should set industry benchmarks and baseline technology standards, as could be applicable, for transparency, disclosure, data privacy, etc., by its members. The SRO-FT should also frame standardised documents for the FinTech sector for specific requirements, for instance, an agreement between the lending service providers and Regulated Entities, RBI proposed.

RBI also added that the Board of Directors (BoD) and Key Managerial Personnel (KMP) should possess professional competence, have a general reputation for fairness and integrity, and meet the fit and Proper Criteria.

Recognising the crucial role of governance in the effectiveness of SRO-FTs, the draft rules prescribe guidelines to ensure transparency, accountability, integrity, and fairness. SRO-FTs are expected to be professionally managed, with clear provisions for conflict of interest, admission criteria, and ongoing monitoring of 'fit and proper' status. The RBI may nominate or depute observers on the SRO-FT Board if deemed necessary, further emphasising the collaborative nature of this regulatory framework.

While releasing these draft rules, RBI said that there were broader questions which still needed answers from the industry, including the number of such SROs required, and their membership. “Should the recognised SRO-FT comprise only of members who are unregulated, or in combination with those who are regulated (even for a part of their activities) is another question that merits discussion. Yet another issue that requires discussion is the number of SRO-FTs that would require recognition. Given the diverse nature of FinTechs, restricting to one SRO-FT could dilute some industry concerns, while having multiple SRO-FTs could undermine the representative character of self-regulation. A consensus on these issues would be crucial to the effectiveness of self-regulation,” said RBI.

Commenting on the rules, Jatinder Handoo, CEO of the Digital Lenders Association of India (DLAI) said, "Draft Framework for Self-Regulatory Organisation(s) (SROs) in the FinTech sector is comprehensive. Particularly, the fact that SROs should be consensus and cooperation-based and the nuances of the sector in terms of nature of business and diversity of market players is very well captured."

"Under the guidance and oversight of RBI, SRO-FT will be able to enhance regulatory compliance culture among FinTechs and build capacities of the sectoral players. As an industry body, regulatory compliance, customer protection, grievance redressal and capacity building have always been our priorities as reflected in our ‘code of conduct’. It is encouraging to see that the SRO framework has an equally strong emphasis on all of these elements," he added.